A tariff is a government tax on imported goods to a country. A tariff reduces free trade between countries, which economists generally believe is better for consumers.
A tariff increases the cost of selling a good. This cost is often passed through to consumers, however, sometimes suppliers or retailers eat a portion or all of the cost. Tariffs on goods are often already taxed, which means the added cost will change the equilibrium level. Demand will generally decrease for elastic products, leading to supply overages.
When there are tariffs, there a few potential outcomes for the product.
- The retailers and suppliers can pass 100% of the costs to the consumer, reducing consumer demand
- The retailers can eat 100% of the cost increases from the supplier, reducing their profits
- The suppliers can eat 100% of the tariffs, reducing their profits
- Retailers can change to a domestic supplier
Retailers changing to domestic suppliers is often the main reason stated for tariffs (along with tax revenue). In a country like the United States, where minimum wages are much higher than in a country like China, it is cheaper to produce products overseas. If the United States reduces the incentive to import goods from China, it can add tariffs in hope of bringing more products, and thereby jobs, to the United States.
While a country may ultimately like to bring more locally, it could still bring negative side effects. If local domestic producers have increased demand and reduced competition, they will likely raise prices. Ultimately, the country in which the tariffs are being placed on will face the larger struggle, but domestic issues could potentially show up with heavy, demanding tariffs. However, if tariffs increase domestic profits, local tax and sales revenue also increase.
Tariffs are a complicated tax and have played a major role in the past, but have become a prominent discussion point in 2025.
